DJ Natural Gas Hits Seven-Week High on Signs Oversupply May Wane
By Timothy Puko
Natural-gas prices rose to a seven-week high as warm weather and slowing production are causing a rally by forcing
bearish traders to cut their positions.
Prices for the front-month June contract settled up 9.5 cents, or 3.4%, at $2.897 per million British thermal units
on the New York Mercantile Exchange. It is the highest closing price since March 18. Gas is also nearing a bull market,
rising more than 16% since it closed at a 2 1/2-year low on April 27.
This week's weather forecasts have sparked more optimism than the ones from late last week, Dominick Chirichella,
analyst at the Energy Management Institute, said in a note. Forecasts show warmer-than-normal temperatures settling in
over the entire East Coast and large parts of the Midwest for most of the second half of May, raising expectations that
power plants could burn more gas as customers turn on their air conditioners, analysts said.
That has caught many off guard, analysts and traders said. Bets on falling prices have outnumbered bets on rising
prices by more than three to two for several weeks, according to regulatory data. And when a bearish trade, also called
a short trade, gets that crowded, markets become vulnerable to investors flinching at any sign they might be wrong,
analysts and traders said. They can flood in and buy back contracts all at once, bidding up the price.
"Everybody knew weeks ago it was going to be 90 degrees today. It wasn't news. But people who are short start
covering their position and then it snowballs," said Scott Gettleman, an independent trader in New York.
In addition to weather, some also believe new drilling data indicate an oversupply situation may be waning, said Matt
Smith, an analyst at consultant Schneider Electric SA in Louisville, Ky. The U.S. Energy Information Administration's
monthly drilling production report from Monday pointed to the potential for falling production in June, which also fed
gains, most of which came in the morning, Mr. Smith said in a note.
EIA said Tuesday afternoon that it expects total U.S. production this year to exceed its forecast from just a month
ago. Its Short-Term Energy Outlook predicted production will average a record 75 billion cubic feet a day in 2015, up
0.9% from last month's forecast.
Producers are likely to have 3.9 trillion cubic feet in storage before November, and the 2.4 trillion cubic feet they
are likely to add to stockpiles this year would be the second-highest addition on record, EIA said. It lowered its
price expectations in response, predicting a $2.93/MMBtu average in 2015, down 4.6% from what it forecast in April.
There are also signs that power plants may be done increasing the amount of gas they consume. Because gas is cheap,
gas-fired power is likely to increase to 3,441 thousand megawatthours a day this spring, while coal-fired power will
fall to 3,602, EIA said. But it expects gas's gains end there and that coal will retake market share through the rest
of the year. Power plants are probably already "maxed out" in the amount of gas they can burn.
"There is finite storage. You can't really ship it anywhere else," said Marc Kerrest, who runs a gas-focused fund,
Cornice Trading LLC, in San Francisco. "The fundamentals are still really bearish."
He has bought more options to insure more limited losses if prices keep surging, he said. But ultimately he is still
in bearish bets that will pay off if futures prices fall.
FUTURES SETTLEMENT NET CHANGE
Nymex June $2.897 9.5c
Nymex July $2.945 9.6c
Nymex August $2.969 9.9c
CASH HUB RANGE PREVIOUS SESSION
El Paso Perm $2.63-$2.68 $2.62-$2.69
El Paso SJ $2.635-$2.665 $2.62-$2.69
Henry Hub $2.84-$2.87 $2.82-$2.90
Katy $2.815-$2.83 $2.80-$2.83
SoCal $2.79-$2.81 $2.76-$2.80
Tex East M3 $1.64-$1.80 $1.98-$2.05
Transco 65 $2.85-$2.905 $2.845-$2.90
Transco Z6 $2.87-$2.94 $2.98-$3.13
Waha $2.70-$2.72 $2.69-$2.7050
Write to Timothy Puko at tim.puko@wsj.com
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(END) Dow Jones Newswires
May 12, 2015 16:02 ET (20:02 GMT)
Copyright (c) 2015 Dow Jones & Company, Inc.
051215 20:02 -- GMT
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